Know Your Rights

As the owner or operator of a small or mid-sized business, you deserve ― and should expect ― competitive pricing and the best value for payments processing … including credit, debit and prepaid card processing.

Fees for card processing services are likely the third highest expense your business incurs, following right behind labor and product costs. Card processing is complex, and many businesspeople are confused by what they are really being charged and who they are actually paying. That’s because statements are confusing, the fees are automatically debited from your bank account and there are often unnecessary middlemen and undisclosed markups.

The fact is there are three components of processing fees you, like every card-accepting merchant, must pay every month:

1. Interchange.

Interchange is the fee charged for passing financial transactional information back and forth between your business, your payments processor, the card brands (Visa®, MasterCard® and Discover® Network*) and the banks that issue credit, debit and prepaid cards. This fee is imposed by the card brands, not by card processors, so issuing banks can recoup the costs of card issuance. You pay this fee on every card transaction you process.

The brands charge as many as 250 different interchange rates depending on the type of card and how it’s used. For example, a transaction initiated by a card being swiped through a reader is charged at a different rate than one that begins with card numbers being keyed in by hand. Likewise, corporate card transactions are billed at a different rate than travel and entertainment cards … that are billed at a different rate than other cards. Click here to see the interchange rates.

While the rates for different transactions and cards vary, they are set by the card brands … and cannot be changed by processors. Yet, many processors significantly mark up interchange rates to generate extra revenue. What many owners of small and mid-sized businesses don’t realize is that ― unlike larger companies with resources focused on reducing costs ― they are likely paying significantly more because of these undisclosed markups.

* To learn more about American Express’ pricing model, click here.

2. Dues and Assessments.

Dues and assessment fees ― also called acquirer brand volume fees (ABVFs) ― are imposed by the card brands to cover their operating costs and are determined by the purchase price of a product or service. Currently, Visa’s assessment fee is .0925 percent, MasterCard’s ABVF is .0950 percent ― changing to .11 percent as of April 16, 2010 ― and Discover Network’s assessment fee is .0925.

3. Processing Fees.

These are the fees your card processor charges for authorizing and/or settling credit/debit/prepaid cards and routing money and data to complete transactions. Charges vary between processors, so beware.

Often, what initially looks like a "good deal" is not what it appears to be. A processor may quote you a low rate for a specific type of transaction to “make the sale” ― but deliberately neglect to point out that only a small percentage of your transactions qualify for that low rate … and the remainder are charged at a fee that could be as much as double or triple that low rate.

Large merchants have the resources to recognize ― and avoid ― interchange mark ups, junk fees and other unnecessary charges that smaller businesses may needlessly incur. Likewise, if you know which fees are legitimate and exactly what ― and who ― you are paying for each transaction, you can control your card processing costs.

Visa, MasterCard, Discover Network and American Express typically adjust interchange rate categories and fees annually in April and October. When rates go up, many processors seize the opportunity to inflate them even more ― and then deceptively blame the increase on the card brands.

Undisclosed fee markups like these are only a fraction of the increases some processors and their middlemen arbitrarily impose. Unlike large merchants who have the resources to identify ― and eliminate ― these charges, owners of small and mid-sized businesses like you usually fall prey to paying them. Once you recognize these additional markups, you, too, can reduce your processing costs.

Oftentimes, annual fee adjustments by Visa, MasterCard, Discover Network and American Express include reductions in some card transaction categories. And, while many processors and their middlemen eagerly pass fee increases along to larger merchants, most don’t pass reductions onto small and mid-sized merchants.

In 2003, for example, Visa/MasterCard settled the Wal-Mart class action suit which called for hundreds of millions of dollars of fee reductions. All large merchants received their share. Most small and mid-sized businesses did not because of a loophole in the settlement agreement that allowed processors and their middlemen to keep the savings.

Likewise, Visa/MasterCard often grant incentive programs for certain card types and categories of merchants ― such as small-ticket merchants. Say a restaurant has an average ticket of $40. There is one pre-set interchange rate for all swiped transactions that fall within the normal range of that average ticket. But, if the ticket drops below $15, Visa issues a fee reduction of about $.05. Yet, few processors pass this fee reduction directly onto the restaurateur.

Fee reductions and incentive programs can significantly impact your profitability ― just like increases can. It is not fair to pay for the increases while being excluded from the decreases and incentives. It starts with awareness … and then insisting your processor passes the savings on.

The chain of events that begins when you swipe a customer’s card is fairly straightforward. At minimum, it requires four essential entities to process the transaction: a bank, a card brand (Visa® / MasterCard® / Discover® Network / American Express®), a telephone or Internet connection and a processor. The processor operates the computer systems that authorize and settle transactions and convert them into money to be deposited into your bank account.

This simple process doesn’t change ― but becomes more expensive ― when non-essential middlemen are involved. Sometimes, as many as 12 additional entities take a cut from one simple transaction.

There can be the:
(1) independent contractor that represents
(2) a sub-ISO of
(3) an ISO which represents a bank or processor. Plus
(4) a referral group
(5) an accounting firm or
(6) a non-processing bank. Add in
(7) the enterprise software company
(8) the software salesperson and
(9) the dealer who sold the equipment – plus the
(10) IP gateway provider
(11) the person who sold it and
(12) the network software provider.

The bottom line is a lot of middlemen can be making money off of every single transaction. When too many entities are involved, it makes it hard for you ― and other owners of small and mid-sized businesses ― to control your costs.

Large merchants don’t allow middlemen to be involved because they recognize the drain on revenue does not come with equivalent value. You shouldn’t allow these unnecessary drains on your revenue either.

Many processors and their middlemen hide arbitrary charges ― often classified as “surcharges” ― without disclosing them to merchants. These charges are pure profit to processors and their middlemen, making transactions that are already expensive even more costly for you.

To make matters worse, these markups ― along with other related fees ― often appear on bills issued the month following the actual transaction with little or no explanation. And, they are debited directly from your account. These markups ― known as “bill-backs” or “enhancements” ― are often undisclosed and make rates appear to be lower than they actually are.

Big merchants never pay these extra markups. Success is difficult enough for small and mid-sized businesses. You should not be further challenged by surcharges and bill-backs.

Service and support are critical factors in implementing and maintaining a card acceptance program. Unlike national merchants, you may lack the resources needed to ensure proper training, ongoing support ― and the best available rates.

So, you rely on your processor for:

  • Initial and ongoing training
  • Deposit tracking and reconciliation
  • Fast assistance to eliminate downtime

Yet, many owners of small and mid-sized businesses never hear from their processor after the initial sale or receive any ongoing support.

You should expect more. A trained employee of the processor who proactively calls is often the most efficient, cost-effective way to train management and staff, track and help reconcile deposits, and ensure all equipment is in working order. Your partnership with your processor is important to your ongoing success.

Obviously, you would never want the credit, debit and PIN numbers of your customers stolen by hackers. Large payments processors prevent hundreds of thousands of attempted hacks every day with layers of state-of-the-art security, technology and techniques to safeguard sensitive account information.

Data security solutions are quickly evolving, yet, not all processors guarantee encrypted card numbers throughout the transaction lifecycle and secure payments. Many have not implemented the most advanced technology, and if they have, may not have made the financial investment required to completely protect their systems. This puts every merchant at risk ― especially small and mid-sized businesses that don’t have the internal resources to ensure their customers are protected … unlike their larger counterparts. It also puts the millions of consumers who use credit and debit cards at risk … with possibly devastating consequences. Robust security and data encryption is a must ― not an option.

Credit and debit card fraud costs American businesses billions of dollars every year. Thieves work overtime to find ways to steal from merchants. Often disgruntled or dishonest employees ― even some customers ― are masters at making money the illegal way ... and not getting caught.

As such, real-time fraud and transaction monitoring are critical to your business’ success. That’s why large merchants have entire departments and controls devoted to detecting and preventing fraud. They analyze patterns and transaction types in real time, identify suspicious activity and take quick action to counter it. On the other hand, you probably need to rely on your processor to provide these services. Yet, many processors don’t provide them, leaving you exposed and vulnerable. You must recognize this risk and protect yourself against it.

When big companies buy equipment, they often solicit proposals from multiple equipment manufacturers to drive the best deal. As the owner of a small or mid-sized business, you may not have the time or resources to shop around for a payment device, so you probably turn to your processor for guidance. However, you’re probably not getting the deal you’ve bargained for ― and you most likely don’t know it.

Most processors sell the concept of multi-year equipment leasing. Contracts span three to five years ― sometimes longer. It’s during the sales pitch that the deception comes in:

“My company [almost always a middleman] can save you $100 per month on your processing fees … and this new machine will cost you only $49 per month. You save $51 per month for as long as you use it.”

Yet, most new payment terminals cost only $250 to $500 and can easily be purchased at large big-box retailers or on the internet. With a five-year lease at $49 per month, that terminal ends up costing $3,000.

Thousands of dollars go to the independent contractor who sold the equipment as well as the sub-ISO and ISO middlemen who represent the processor and sold the lease. Add taxes and insurance to that ― plus a 10% fee (another $300) to gain ownership of the equipment at the end of the lease … and the result is … you’ve paid way too much for a non-cancelable lease.

To make matters worse, the $100 monthly savings on processing fees usually never appears, and if it does, the savings is wiped out with the next markup of rate changes by one of the other middlemen.

Knowing this simple fact can save your business a significant amount of money.

With most Americans relying on credit and debit cards for their purchases, one minor problem that prevents or delays the processing of transactions at the point of sale can have devastating effects. Combine the ripple effect of customer dissatisfaction with lost revenue, and it’s easy to see why live customer support 24 hours a day, 7 days a week, 365 days a year is mission critical for all merchants.

Large merchants are armed with internal systems and support teams that can immediately respond to and minimize disruptions in service. But, small and mid-sized merchants like you rarely have those resources in-house. Regardless of how big or small the problem ― whether it’s equipment failure, a connectivity issue or any other eventuality that can impact processing ― you become a powerless victim during an emergency if all you can reach is an automated phone line. A simple phone call or on-site visit from a support professional often makes the difference between a good day ― and a disastrous one.